Blog from a Financial Advisor in St. John's, NL

April 30, 2015April 12, 2015

Credit Cards are not the Enemy

A lot of people are scared, uneasy, or mistrusting of credit cards. There are tons of horror stories of people who put a vacation on a credit card and spent the rest of their lives trying to pay it off. I’m here to tell you that credit cards aren’t all bad. In fact, when used strategically, they can be a huge asset to your personal wealth. In addition to being convenient, the responsible use of credit cards helps build your credit history which you will need in the future if you need to qualify for a loan or mortgage. Here are a few pointers that will ease your mind and allow you to wield credit cards as a weapon in your financial arsenal.

Avoid Interest Charges

The biggest aversion that people have to credit cards are interest charges. Most cards carry massive interest rates, ranging from 19% to 29% and beyond. This is a pretty terrifying reality. Think about it: every item you purchase with the card could potentially cost you 29% more if you allow interest to kick in. But there’s good news: you never ever have to pay interest! All you have to do is pay off your balance in full every month by the deadline and you will never be charged a penny.

That’s easier said than done for some people. The magic of cash is that you can physically see it disappearing from your wallet as you spend it, preventing you from overspending. With credit, sometimes people can get carried away with the illusion of a magic piece of plastic that buys us things. If you find over spending to be a temptation of yours, you need to be super disciplined to write down everything you buy and stick strictly to a balanced budget. Remember: to avoid interest payments, you must pay off the entire balance every month. Don’t be suckered into paying just the “minimum balance”. If even a single dollar of the balance is left on the card, you will often be charged interest on everything; not just the remaining balance.

Example: if your monthly card statement says your ending balance is $100 and you pay back $100, you be charged $0 in interest! Awesome! But, if you pay back $99, leaving a balance of $1, you will be charged interest on the entire $100, not just the remaining $1.

Rewards can get you free stuff

We all spend money. It’s an unavoidable part of life. Basic necessities like food, clothes, and shelter all require money. So if life is forcing you to spend, you might as well be rewarded for doing so. A ton of credit cards comes with a range of reward offers. Some will give you cash back, some will let you travel for free, some will even give you movie tickets. Being frugal as I am, I would recommend a card with a reward that forces you to put it to good use. My card gives me free groceries, which is great because groceries is something I’m always going to need to buy anyway. Might as well get them for free!

A word of caution about rewards: don’t be lured into premium cards with truck loads of “bonus” rewards. Typically, these cards are able to give you bonus rewards only because there is an annual fee attached. It’s of little benefit for you to get a slightly bigger bonus if it costs you $120 a year in fees. All this will do is entice you to spend more (perhaps frivolously) just to “get your money’s worth” from your fee.

Set Limits When Needed

From time to time, if you’re credit rating is good enough, the credit card company will send you a letter offering to raise your credit limit. This is because you’ve proven yourself to be a reliable borrower and always pay off your balance every month (right?). Resist the urge to accept their offer. Think about why they are offering to raise your limit. It’s not charity; they’re trying to bait you into over spending so they can ding you for interest charges.

As long as you’re able to live comfortably and conveniently within your current credit limit, I wouldn’t recommend raising it. There are legitimate reasons to raise your limit. For example, I raised mine when I was in university because my credit limit wasn’t enough to absorb all of September’s hefty bills at one time (tuition, books, supplies, etc). Raising your limit, however, opens you up to temptation and (even worse) credit card fraud. A big juicy credit limit can make you a target for theft. In the wrong hands, that big limit can do some serious damage.

Some people also like to have a separate “online only” credit card with a relatively small limit. This is a good idea if you do a lot of online shopping and don’t want to put your main high-limit card at risk. Open up a separate card with a small limit (less than $500) and only use that card online. This way, in the unlikely event of your credit card info being stolen online, at least it’s not your main card and the culprits don’t have a huge credit limit to work with. In addition to limiting the damage, you also need to prevent theft by shopping online only with reputable sites or using secure payment services like PayPal.

Be Smart, Be Savvy

Credit cards have a bad reputation, but I love them. I use them all the time. By following the few pointers I discussed above, you can use these nifty cards to your benefit. Just be smart and savvy. Always pay off your balance every month, use your rewards to your advantage, and set appropriate limits.

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Disclaimer:

This blog is for informational and entertainment purposes only. The information on this site may not apply to your unique financial situation. Always consult with a professional financial planner before making any major financial decision.